The FCA’s fintech sandbox is already delivering value

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Since the UK’s Financial Conduct Authority (FCA) launched its regulatory sandbox in 2016, 89 companies have been accepted to test their products and services. Now, a newly released report by Deloitte and Innovate Finance has found that companies that have been in, or are still journeying through, the FCA’s sandbox believe it has delivered real value.

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The record number of intakes for the latest cohort – 29 from 69 applications, compared with a maximum of 24 accepted for previous intakes – supports this finding, suggesting that companies are benefiting from testing their products in a live environment with regulatory oversight.

Here are some key findings from the report:

Companies cited a variety of reasons for applying. Some of the top reasons for applying were regulatory engagement and the opportunity to test products in a live environment. Additionally, most participants said acceptance increased their credibility with investors and customers.

Respondents said the sandbox helped them identify flaws early on and fine-tune their offerings. Specifically, participants said the challenges posed by the FCA encouraged them to thoroughly evaluate their propositions and risks inherent, better preparing them for future challenges.

Despite the sandbox’ benefits, many found the authorization process especially challenging. Once accepted, firms are required to complete paperwork to gain authorization for their live tests, a process many found daunting. Those without previous knowledge of financial regulation in particular struggled to interpret the FCA’s handbook, creating an uneven playing field between participating startups.

The success of the FCA’s sandbox will likely to continue to spur other regulators to follow suit. We have seen a number of regulatory sandboxes emerge, from Europe to the US, no doubt in part motivated by the success of the FCA’s sandbox, and we are likely to see this trend continue.

However, while sandboxes highlight the role authorities can play in reducing regulatory barriers to entry, the results from this report suggest these efforts can further be refined to improve the process. A recurring point for improvement suggested by participants is for a simpler way to navigate regulatory handbooks.

Separately, the added credibility benefit of acceptance into the sandbox is a point regulators need to keep an eye on, as it creates an uneven playing field between those accepted and rejected. Given regulators, as the FCA notes, are not in the business of “picking winners,” these divergences in opportunities could stunt innovation.

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